Fed's communication found able to massage long-term rates

The Federal Reserve Bank of San Francisco, in an Economic Letter on "Fed Communication and the Zero Lower Bound":

... although the zero bound prevented the Fed from using its main conventional monetary policy tool, it did not constrain the Fed’s ability to affect long-term interest rates through communication with the public.

My interpretation: Intuition (that policy communication is anything but poweless) supported by study based on hard facts. Food for thought for policymakers in a number of developing countries who seem to remain shy of engaging in more active public communications.

How did the study measure Fed communication?

The Fed, and a number of other central bank, relied on other tools — including communication — to work around the constraints of being unable to lower the federal funds rate below zero. In evaluating the use of communication as a policy tool to overcome the zero bound constraint, the study constructed a measure of Fed communications based on textual analysis of newspaper articles and estimated how those messages affected interest rates before and during the ZLB period.

On the methodology used, the San Francisco Fed said:

... we construct a Factiva semantic orientation (FSO) by first collecting from the Factiva database all news articles in English that contain the words “Fed,” “Federal Reserve,” or “FOMC” in the headline that appear the day before, the day of, and the day after the communication date. That database provides a daily clipboard of articles from major world newspapers. From these articles, we select all sentences containing at least one of the following words: rate, policy, statement, announcement, Fed, FOMC, and Federal Reserve. We then count the number of times the words “hawkish,” indicative of a tight monetary policy stance, and “dovish,” indicative of a looser policy stance, are used in the selected sentences. The FSO is the ratio of the number of hawkish to dovish mentions. Therefore, a larger FSO value suggests that the communication is interpreted as more hawkish than dovish, that is, having a relatively tighter policy stance.

Our communication dates are days of FOMC statement releases and speeches by the Federal Reserve Chair. We compare the effects of Fed communications during the pre-ZLB period (May 1999 to November 2008) with those during the ZLB period (December 2008 to December 2014). This yields a sample of 151 communication dates and FSO scores during the pre-ZLB period and 89 during the ZLB period.

Estimated yield changes following Fed communication surprises

Estimated yield changes following Fed communication surprises

The figure above neatly illustrates the main findings:

... longer yields, continue to respond to communication surprises in a way that is basically unchanged relative to the pre-ZLB period.

... despite the constraint on the Fed’s ability to influence short-term yields during the zero-bound period, communications continued to allow the Fed to affect longer-term yields.